Climate risk and the systemic risk of banks: A global perspective

Abstract

This paper explores the impact of climate risk on the systemic risk of banks around the world and examines its influence channels. Our findings indicate that a country’s exposure to climate risk can significantly increase the systemic risk level of its banks. Moreover, we find that the increased bank systemic risk due to higher climate risk is mostly driven by worsened credit quality rather than the depreciation of the bank’s investment portfolio. The adverse impact of climate risk is mitigated when banks have higher profitability or capital adequacy. Cross-sectionally, this effect is particularly significant for banks with extensive branch networks, high importance in the domestic credit market, a lack of dividend payments, and those classified as commercial banks. We also find that banks located in countries with higher loan interest rates, worse regulatory quality, and higher carbon emission intensity are more impacted by climate risk.